Morning Report: The bond vigilantes return

Vital Statistics:


  Last Change
S&P futures 3699 -19.3
Oil (WTI) 50.02 0.24
10 year government bond yield   1.03%
30 year fixed rate mortgage   2.78%

Stocks are lower this morning as the Georgia runoff results are coming in. Bonds and MBS are getting clobbered.


Democrats have won one of the GA Senate seats and the other remains too close to call. Unified control of the country by Democrats is bearish for stocks and bonds, and the 10 year is trading above 1%.


The reaction in the bond market indicates that the bond vigilante is awakening from its 30 year slumber. The Bond Vigilantes bedeviled Bill Clinton’s first term as anything he did to stimulate the economy was greeted with higher interest rates.


The FOMC minutes will be released around 2:00 pm this afternoon. It probably won’t be market-moving, but just be aware.


Mortgage Applications fell 4.2% over the two week holiday period as purchases fell 0.8% and refis fell 8%. “Mortgage rates started 2021 close to record lows, most notably with the 30-year fixed rate at 2.86 percent, and the 15-year fixed rate at a survey low of 2.40 percent,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The record-low rates for fixed-rate mortgages is good news for borrowers looking to refinance or buy a home, as around 98 percent of all applications are for fixed-rate loans. Despite these low rates, overall application activity fell sharply during the holiday period – which is typical every year. Refinance applications were 6 percent lower than two weeks ago, and purchase activity less than 1 percent from its pre-holiday level.”


The economy lost 123,000 jobs in December, according to the ADP report. The Street is looking for 65,000 jobs in this Friday’s jobs report.


Manufacturing improved in December, according to the ISM Report. Overall, the report says that despite the COVID-19 headwinds, things are getting better. One thing did jump out at me: Every commodity was up in price. Nothing was down, and there were all sorts of shortages. Whether this is just a COVID-related bottleneck remains to be seen, but commodity booms are usually associated with higher inflation.

Morning Report: Another mortgage banking IPO

Vital Statistics:


  Last Change
S&P futures 3683 -9.3
Oil (WTI) 48.82 0.24
10 year government bond yield   0.93%
30 year fixed rate mortgage   2.78%

Stocks are lower this morning after yesterday’s sell-off. Bonds and MBS are flat.


Construction spending rose 0.9% MOM and 3.8% YOY. Residential construction rose 2.6% MOM and 16.2% YOY. 2021 should be a breakout year for housing construction.


Home prices increased 1.1% MOM and 8.2% YOY, according to CoreLogic. “The housing market performed remarkably well in 2020 despite the volatile economic state,” said Frank Martell, president and CEO of CoreLogic. “While we can expect to see lingering effects of COVID-19 resurgences and subsequent shutdowns in the early months of 2021, vaccine distributions and stimulus actions should revitalize economic activity and keep home purchase demand and home price growth strong.” FWIW, I believe that economists are not factoring into their forecasts that housing starts are going to rocket this year. Housing as has a huge multiplier effect and that will offset some of the COVID-driven weakness.


Many economists are forecasting mortgage rates to stay in the 2% range next year. The MBA forecasts rates will rise in the second half of next year. Personally, I don’t see that happening. The Federal government is writing checks to people in order to put money in people’s pockets. One of the most bang-for-the-buck ways to do that is to lower someone’s housing payment. The Fed wants the refi boom to last – that is partly why it is buying MBS.

What about inflation? The Fed has said it wants to target an average inflation rate, and since inflation has been below the Fed’s 2% target for years, they will have to accept inflation above the 2% target for a long time in order to get the average up. While the Fed has been pulling out all the stops trying to create inflation, that doesn’t guarantee it will be successful. Witness Japan, which has run the same playbook for a generation only to achieve deflation.


Striking while the iron is hot: Amerihome is the latest mortgage banker to file for an IPO. The company plans to raise about $250 million and the price talk values the company around $1.3 billion.

Morning Report: Housing affordability declines

Vital Statistics:


  Last Change
S&P futures 3763 14.3
Oil (WTI) 48.72 0.24
10 year government bond yield   0.94%
30 year fixed rate mortgage   2.78%

Stocks are higher this morning on strong overseas economic data. Bonds and MBS are down small.


This week contains a lot of Fed-speak as well as the FOMC minutes on Wednesday. On Friday, we will get the jobs report. On Tuesday, the GA Senate runoff elections will happen, and that could be market-moving as well. Gridlock will be more positive for the markets than an aggressively leftist one will be.


Joe Biden is setting up for an aggressive regulatory state, at least on the environmental side. I have to imagine he will do the same thing on the financial side.


The decrease in interest rates has pushed up housing prices and is making homes less affordable, according to data from ATTOM. “Owning a home in the United States slipped into the unaffordable zone for average workers across the nation in the fourth quarter as the numbers continued a year-long slide in the wrong direction,” said Todd Teta, chief product officer with ATTOM Data Solutions. “The latest housing market data shows the average worker unable to meet the 28 percent affordability guideline used by lenders. That’s happened as home prices have continued rising throughout 2020 and the housing market has remained remarkably resilient in the face of the brutal economic fallout from the coronavirus pandemic. The future remains wholly uncertain and affordability could swing back into positive territory. But for now, things are going in the wrong direction for buyers.”


New York State bans evictions. It also prevents lenders from foreclosing on landlords who own 10 or fewer units.

Morning Report: Pending Home Sales fall

Vital Statistics:


  Last Change
S&P futures 3720 -4.3
Oil (WTI) 47.92 -0.44
10 year government bond yield   0.92%
30 year fixed rate mortgage   2.78%

Stocks are flattish as we end out 2020. Bonds and MBS are flat as well.


Pending Home Sales fell 2.6% in November, according to NAR. Year-over-year contract signings were up.

“The latest monthly decline is largely due to the shortage of inventory and fast-rising home prices,” said Lawrence Yun, NAR’s chief economist. “It is important to keep in mind that the current sales and prices are far stronger than a year ago.”

“The market is incredibly swift this winter with the listed homes going under contract on average at less than a month due to a backlog of buyers wanting to take advantage of record-low mortgage rates,” Yun said.


For 2021, NAR predicts existing home sales will rise 10% and new home sales will rise 20%. The mortgage rate will rise slightly from 2.7% to 3%.


Initial Jobless Claims fell to 787k last week.


Other than that, have a Happy New Year and see you on the other side.

Morning Report: Doug Kass’s 15 surprises for 2021

Vital Statistics:


  Last Change
S&P futures 3743 15.3
Oil (WTI) 48.22 0.64
10 year government bond yield   0.95%
30 year fixed rate mortgage   2.78%

Stocks are higher this morning on no real news. Bonds and MBS are up.


Home prices rose 1.6% in October and were up 7.9% on a year-over-year basis. With mortgage rates continuing to hit new lows, and a complete dearth of inventory, home price appreciation should continue.


Doug Kass released his 15 surprises for 2021. Doug’s surprises are always an entertaining read. Note that by definition, a “surprise” is not a high-probability event, it is like picking an upset in your NCAA bracket. Some of more interesting predictions revolve around inflation:

Surprise #5 Bottlenecks Multiply and Inflation Surges –There are bottlenecks everywhere in 2021 and inflation in places beyond financial assets. As the economy reopens, there are shortages of almost everything. Commodities boom, but so do service prices. It seems that prices of everything from shipping to manicures are on the rise. The infrastructure bill sends construction material prices through the proverbial roof. Pent up savings are unleashed in robust consumer demand. Concerts, sporting events reopen with limited capacity and tickets are in hot demand. Residential real estate (single and multi family) soar in price, as people put stimulus, the recovery and stock market winnings into real estate. By mid-year, even the badly manipulated CPI is running up +4%.

Surprise #6 Inflation and Interest Rates Rip Higher Leading to A Valuation Reset (Lower) For Equities in 2021… At first, the bond market reacts “normally” to rising inflation. The 10 year yield breaks 2% (to the upside). The stock market has a late spring/early summer wobble in response to rising rates and the possibility that target inflation will force higher rates. A mid-year Treasury auction goes poorly. The Federal Reserve, faced with the dilemma of choosing between a lower stock market and higher inflation, chooses to accept higher inflation. The Fed announces a cap on the 10 year yield at 1.5% and expresses its willingness to do whatever it takes to enforce it. In effect, the Fed becomes the Treasury buyer of first resort. This sends stocks, commodities and most everything briefly higher (towards the upper end of the 3600-3800 S&P trading range) – except the dollar, which falls 10%-15%. Though temporarily ignored by infinite liquidity and easing financial conditions at all costs, it grows clear that Covid-19 spurred a dangerous leveraging up in the global economy that has been almost constantly in place since The Great Decession of 2008-09. Higher inflation and interest rates bring the “bond vigilantes” out of their long hibernation. Stocks fall by -15% over the last six months of the year as price earnings multiples contract in the face of the highest level of corporate defaults in over a decade (led by companies in the retail space and others that were already struggling prior to the virus). Credit spreads (now at record lows), widen dramatically, the CLO market collapses and private equity companies are among the worst market performers of the year.

Doug’s comments about shortages touches on what has been missing from the whole inflation puzzle. Market prognosticators have been wrong about inflation for decades because they focus solely on the monetary aspect. Inflation is too much money chasing too few goods. The “too few goods” piece of the puzzle has been missing, since China has been producing cheap goods for decades. “Too much money” is a necessary, but not sufficient, condition for inflation.

One of the “tells” for higher inflation is higher capacity utilization. This is an indicator that factories are maxed out, and increasing demand will push up prices, not output. Take a look at capacity utilization over the past 50 years:

Compare capacity utilization rates in the 1970s versus today. If demand increases, there is plenty of slack in the system to meet it. Obviously COVID is adding some constraints, but that is a temporary phenomenon.

I do think Doug’s point about the Fed capping the Treasury yield is interesting, although I think with all of the deflationary forces around the world: Japan, Europe, it will be hard to create an inflationary cauldron in the US while the rest of the world struggles with deflation.


Morning Report: Stimulus Bill Passes

Vital Statistics:


  Last Change
S&P futures 3721 25.3
Oil (WTI) 48.21 0.24
10 year government bond yield   0.96%
30 year fixed rate mortgage   2.78%

Stocks are higher this morning after Trump signed the COVID-19 relief bill. Bonds and MBS are down.


The stimulus bill includes $600 checks for most Americans, and also includes a continuing resolution to keep the government open.


This should be a quiet week between Christmas and New Years. Markets will be closed on Friday, and the bond market closes early on Thursday. There doesn’t appear to be any market-moving data either, although we will get Case Shiller and Pending Home Sales.


While Treasury yields have been inching up, mortgage rates continue to hit new lows. This has been driven primarily by Fed MBS purchases and increased competitive behavior from originators. While existing homeowners are benefiting from lower rates, the first time homebuyer is struggling to find anything affordable as inventory is stuck at record lows.


Unintended consequence of Fed policy: stock market margin debt is at an all-time high. Today’s WSJ has a story of a guy who sold his house and spent some of the proceeds to buy Tesla call options. IMO the Fed has painted itself into a corner here, and I suspect returning to any sense of pre-COVID normalcy will be a rough road indeed. Meanwhile, Bitcoin continues to soar, and home prices are rising at a double digit rate.



Morning Report: Home Prices rise

Vital Statistics:


  Last Change
S&P futures 3691 15.3
Oil (WTI) 47.41 0.24
10 year government bond yield   0.95%
30 year fixed rate mortgage   2.78%

Stocks are higher this morning on no real news. Bonds and MBS are down small.


President Trump has indicated dissatisfaction with the stimulus bill passed by Congress. He wants higher payments and much of the extraneous stuff pulled out. He didn’t expressly say whether he would veto the bill as-is. There are all sorts of things in there that have nothing to do with stimulus (new penalties for illegal streaming, funds to Pakistan for gender studies, etc), and my guess is that stuff is going to have to go.


Mortgage applications increased by 1% last week as purchases fell 5% and refis rose 4%. “The 30-year fixed rate – at 2.86 percent – is a full percentage point below a year ago,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Last week’s increase in refinance applications was driven by FHA and VA activity, while conventional refinances saw a slight decline. Overall refinance activity was 124 percent higher than in 2019, as borrowers continue to seek lower monthly payments or different loan terms.” Despite the drop in purchases they are still up 26% on a YOY basis.


Personal incomes fell 1.1% in November, and personal spending fell 0.4%. Inflation as measured by the personal consumption index came in at 0% on a MOM basis and 1.1% on a YOY basis. Inflation is way below where the Fed wants to see it, and unless we see a dramatic shift in these numbers, the Fed will keep the pedal to the metal with asset purchases and 0% interest rates.


Home Prices rose 1.5% MOM and 10.2% YOY according to the FHFA House Price Index. “U.S. house prices rose for the fifth straight month since states re-opened their local economies,” said Dr. Lynn Fisher, FHFA’s Deputy Director of the Division of Research and Statistics. “The 12-month gain of 10.2 percent in October is the highest annual appreciation observed since the 2004-2005 period. Extremely low mortgage rates and a limited supply of homes for sale continue to propel price gains. The data do not yet reflect renewals of some local and state COVID-19 restrictions.”


New Home Sales fell 11% MOM to 841,000. This is still up 21% on a YOY basis. The median sales price of new houses sold in November 2020 was $335,300. The average sales price was $390,100. I suspect that new home sales will be the big surprise of 2021.


In other economic news, durable goods rose 0.9%, while initial jobless claims fell to 800k last week. Consumer sentiment fell.

Morning Report: Zillow forecasts that 2021 could be the best year for housing since 1983

Vital Statistics:


  Last Change
S&P futures 3690 5.3
Oil (WTI) 47.21 -0.74
10 year government bond yield   0.93%
30 year fixed rate mortgage   2.78%

Stocks are flattish this morning on no real news. Bonds and MBS are flat.


The House and Senate passed a stimulus bill and a funding bill. It allows for $600 checks to be sent to most Americans.


The third revision to Q3 GDP came in at 33.4%. Personal consumption expenditures rose 41%. These were both upside revisions.


Corporate profits rose 10.3% in the third quarter, which was a downward revision.


The number of mortgages in forbearance was unchanged at 5.49% last week, according to the MBA. “The share of loans in forbearance has stayed fairly level since early November, often with small decreases in the GSE loan share and increases for Ginnie Mae loans,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “That was the case last week. Additionally, forbearance requests from Ginnie Mae borrowers reached the highest level since the week ending June 14. Additional restrictions on businesses and rising COVID-19 cases are causing a renewed increase in layoffs and other signs of slowing economic activity. These troubling trends will likely result in more homeowners seeking relief.”


The spring selling season should be the biggest in 40 years, according to Zillow estimates. They expect that there will be a rush for buyers to get into the market before rates rise in the second half of 2021. I suspect that there is a lot of pent-up demand and supply from last spring, where sellers pulled homes off the market because they were worried about strangers entering their homes. Zillow is looking for home sales to hit 6.9 million units, the highest number since 1983.


Existing home sales fell 2.5% MOM to an annualized rate of 6.69 million units. This is still up 26% compared to a year ago. The median home price rose 15% to $310,600. Total for-sale inventory fell to 2.3 months worth, a record low. Homes were on the market for 21 days on average. First time homebuyers accounted for 32% of all sales. Historically that number has been closer to 40%. While low mortgage rates are helping improve affordability, rapid price increases are having the opposite effect.

Morning Report: Stimulus deal

Vital Statistics:


  Last Change
S&P futures 3648 -55.3
Oil (WTI) 47.17 -2.34
10 year government bond yield   0.91%
30 year fixed rate mortgage   2.78%

Stocks are lower this morning on news of a second strain of COVID in the UK. Bonds and MBS are up.


Congress came to an agreement on a $900 billion stimulus package, which will send $600 checks to people, and an extra $300 per week in unemployment benefits. Here is a chart to show where the money is going

There is no aid to state and local governments, which the Democrats desperately want. Chuck Schumer is already saying that there will be another stimulus bill when Biden takes office. Much will depend on the special election in Georgia which will determine which party controls the Senate.


The week ahead should be quiet as we head into the holidays. Markets will close early on Thursday and be closed all day on Friday. We will get a bit of housing data with existing home sales, new home sales, and the FHFA House Price Index.


United Wholesale, which is going public via a SPAC, pushed its IPO to January.


Morning Report: NYC revenues fall $1.2 billion

Vital Statistics:


  Last Change
S&P futures 3718 5.3
Oil (WTI) 48.77 0.34
10 year government bond yield   0.93%
30 year fixed rate mortgage   2.78%

Stocks are flattish as investors hope for some sort of stimulus package. Bonds and MBS are down.


Congress is working on stimulus bill and also a stopgap measure to keep the government funded. There is a tiny possibility that funding could run out over the weekend, but nothing prolonged is envisioned.


Despite the increase in the 10 year bond yield, mortgage rates are at record lows. “Mortgage rate dynamics over the past several months have been less dependent on economic data and more on policy-related matters — both fiscal and monetary — as well as epidemiological developments,” said Matthew Speakman, a Zillow economist. “A new spending package may place some upward pressure on mortgage rates, particularly if the package contains more than has been reportedly debated. Investors have expected the spending package for a while now, meaning it’s likely that most of their reaction has already been priced in. Overall, mortgage rates remain very low and are unlikely to shift unless a blockbuster spending package is passed before the end of the year.”


Falling real estate prices have dented NYC revenues by 1.2 billion. Sales of commercial and resi properties have fallen 49% compared to last year. This has translated into a 42% decrease in tax revenue for the City. The next shoe to drop should be office vacancies as big financial firms like JP Morgan and Goldman have talked about moving more jobs out of the City. Manhattan apartment prices are at 10 year lows, apparently. I have to imaging the apartments in more marginal areas of Brooklyn and Queens are getting absolutely hammered.

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